Archives for July 2019

Opening Gaps the Theme – Financials Leading Banks

As earnings remain the theme over the next few weeks, large gaps on the up and downside at the open can be seen as the more impactful companies report after the close of the previous day. After Wednesday’s close tech giant Netflix delivered a very poor earnings report that looked to weigh very heavily on Thursdays open. However, by morning, those losses were somewhat mitigated and a only a mildly lower open should be seen. After Thursday afternoon’s tech slide, perhaps the bulls will make a little stand.

Price patterns in the Dow, S&P 500 and NASDAQ 100 are now more indicative of a pullback or at least some sideways consolidation than an unabated continuation of the rally. Over the past week or two, we have seen sentiment surveys and option traders show a little too much greed, meaning that they are feeling a little too giddy about the stock market. Typically, after a sizable rally, that can cause some pause or giveback. I certainly do not believe a significant decline is underway nor a bear market.

I continued to be heartened by the recent strength in the semis as well as discretionary. If the banks can get going like the diversified financials have been, we could see another leg higher in stocks during summer. It’s been very interesting to see the banks going sideways while the financials have been so strong. Below, you can see the two groups, banks followed by financials.

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Earnings Season is Here – Internals Fairly Strong

With earnings season beginning in earnest this week, the markets are now focused on two major items, earnings and the Fed. Weaker than expected earnings will give the Fed another excuse to cut rates at the end of July, not that they are really looking for more reasons to cut. With stocks at all-time highs, expectations are now very high for companies to deliver this month. Those that don’t will be severely punished. Sentiment has also become very bullish with the recent move to new highs so any pullback would not be unexpected.

Looking at the major indices, we still have the same issues. While the Dow, S&P 500 and NASDAQ 100 are at new highs, the S&P 400 and Russell 2000 remain well below those levels. The divergent behavior isn’t so much a concern in the right here and now, but if it persists, it can lead to challenges for stocks. On the sector front, semis have stepped up and I do believe they will see all-time highs later this quarter. Discretionary continues to make fresh highs. Transports and banks remain in their ranges and the stock market really needs one to get into gear if we are going to see that run much higher.

Participation in the rally has and is strong. The NYSE A/D Line continues to make new high after new high, behavior not typically seen at the end of bull markets. High yields bonds have pulled back very nicely and constructively although sentiment has certainly soured this month. I don’t think they have seen any kind of peak of significance just yet. Rather, this pullback should end sooner than later and lead to another leg higher in junk bonds.

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Trump 1 – Powell 0

Fed Chair Jay Powell finished his second day of testimony on Capitol Hill and his comments were unambiguous regarding a rate cut. It’s coming and it will not be a one and done. When pressed about the very strong employment landscape, he basically dismissed it and focused on everything his mandate doesn’t include, like weakness in Europe and trade tensions. I couldn’t find those listed in the Fed’s dual mandate of price stability and maximum employment. Um, ah, the economy has full employment. Interesting times we live in. Yes indeed. If you’re keeping score of the Trump/Powell battle, it’s Trump 1, Powell 0.

Stocks continue to drift or creep higher in an unconvincing fashion. On Thursday, the Dow was up almost 1% but the S&P 500 advanced barely .20%. The NASDAQ was even and the mid and small caps were down .25% to .50%, not exactly textbook behavior for the bulls. All four key sector were higher, but junk bonds were not. The same number of stocks rose as declined. While the stock market does look a little tired, it’s very hard to pick any top, let alone this one. Usually, creeper rallies last longer than anyone imagines, but gives back all of those gains very quickly when the tide turns.

My issues up here are that I am no longer in love with stocks like I was in December and January. I turned negative on treasury bonds last week and I have been pushing against gold for a few weeks.It’s no fun being the party pooper, but the risk/reward is not favorable. And if the stock market breaks out convincingly, I will play the chase game very quickly to add to my exposure.

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Powell on the Hot Seat

Wednesday is yet another one of those media created “all-important” days this month as Fed Chair Jay Powell begins two days of testimony before Congress in what used to be called the Humphrey-Hawkins testimony named after the two Congressmen who created the act. With stocks at or near all-time highs the only precedent for an interest rate like the market is expecting at the end of the month is July 6, 1995 when stocks were also at or near all-time highs.

It’s definitely strange that with rates so close to 0%, the markets are craving more easing. Inflation is the big driver and contrary to what so many pundits predicted over and over again as the Fed was printing $4 trillion, inflation hasn’t been anything close to worrisome in more than 10 years. Europe is weak. So is China. The U.S. is softening, but certainly not weak. Beginning an interest cutting cycle with full employment and almost 200,000 new jobs a month can either be viewed as “insurance”, risky or the Fed seeing something alarming. Given the Fed’s perfect track record of never, ever accurately forecasting recession, we can all but rule out the last one.

I am eagerly awaiting the Q&A session after Powell’s opening statement which will be released well in advance of his arrival on The Hill. No doubt, President Trump’s public criticism will be questioned along with Powell’s view on whether he can be fired or demoted. Don’t expect Powell to engage.

Markets remain the same from my view. Price action, which I deemed as incomplete to the upside, should look much more complete after today, although that has nothing to do with the impetus for a decline. The NYSE A/D Line continues to score new highs and high yield bonds act well. Large declines do not begin with this set up. On the negative side, mid and small caps aren’t close to all-time highs. Sector leadership is not strong as only discretionary is at or close to new highs.

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Don’t Go to The Hamptons – Big Move Coming

With the world seemingly focused on Friday’s employment report, I expected a lot more fireworks than we saw. After a gap lower at the opening and some modest follow through, stocks made it all the way back to even before tailing off to end the day. I have been talking about the rally not looking “complete” yet and that is starting to change. Our models remain defensive and only a break above Dow 27.000 on a daily and weekly close with conviction and strong internals will cause a rethink.

Semis have pulled back very nicely and orderly. They are supposed to rally from here. Failure to do so would be a change of character and warning that something is amiss. Banks remain in a range and can only be seen as neutral here. The death of the consumer has been exaggerated for more than a decade, yet discretionary just powers ahead in a leadership position. Transports are at an inflection point. A close above last week’s high should send them on a run and provide some fuel for the stock market to move higher. A move modestly lower could unleash a summer selling wave of more than 10% which would almost certainly spillover into the rest of the stock market.

Overall, sector leadership from my four key sectors doesn’t appear to be all that powerful right here. This seems like one summer to stay tuned and not hang out in The Hamptons!

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Rally Not Complete Even Though New Highs Waning

Stocks continue the traditional holiday week drift higher. The S&P 500 has made fresh all-time highs and I expect the Dow and NASDAQ 100 to follow suit very shortly. The S&P 400 and Russell 2000 may take some time. While I continue to be a little defensive on stocks over the short-term, some of the indicators within our models that caused that in the first place have strengthened. I imagine the next week or so will be key to see how things like advancing and declining volume behave along with where stocks close each day relative to their range.

One thing I have been commenting about on Twitter is that stocks the rally in stocks still does not seem complete. There are certain price configurations which I look for and I mentioned a some a few weeks ago. The rally has been orderly and well behaved and missing the usual ingredients of ending. We will see what Friday brings with the June employment report and last big piece of data before the FOMC meets at the end of June to decide on cutting interest rates.

One negative that it not factored into our models but making the rounds this week is the number of stocks making new 52 week highs. Below you can see the S&P 500 in the top chart and the number of new highs on a daily basis on the bottom chart.

A few weeks ago, you can see the line spiked to over 300, but now sits below 200 as stocks keep slowly marching higher. That’s your typical non confirmation or divergence. Not all of these are negatives and this is one case where I think it’s much ado about nothing.

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